Real Estate Investing - Property Flipping

Increase your Equity Quickly Through Real Estate Flipping

Property Flipping refers to purchasing an investment property with the intention of selling it for a quick profit instead of holding it for natural equity appreciation.

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How Real Estate Flipping is Done

In real estate investment, property flipping is the strategy of buying an investment property, and on-selling it within a short period of time (usually under 1 year) for a quick profit.  It is usually done through 2 ways:

1. The first is a renovation and flip (aka reno-flip), where an investor buys an undervalued property, improve its valuation through cosmetic renovations or improvements, and on-selling, usually for a profit. 

2. The second is where real estate investors buy in a rapidly appreciating market and on-selling with little or no improvements to the property.  This is more like a gamble, buying with a hope that the property being invested will appreciate.

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Risks of Real Estate Flipping

Property Flipping is a quick, proven way to make quick equity (make quick money) in real estate investment, if and only if, done correctly with the right property, in the right property cycle, depending on your investment strategy and goals. 

It is very often easier said than done.  Market conditions can change rapidly, and it has been proven to change very unexpectedly in recent years. 

When market conditions change, the property investor can be left holding onto an investment property that will usually affect his / her subsequent property investment plans.  Flipping requires more than a casual understanding of the property market in the suburbs and regions you are interested in.  With flipping, you usually do not have the luxury of time, to hold the property for too long.  You should always remember, that you are paying mortgage interests on the property being flipped. 

A really good, broad and in-depth understanding of supply and demand of the different types of properties in the area/s is critical to a successful flip strategy.  Not all cheap properties are suitable for a successful flip.  And different types properties needs different flipping strategy.  And the strategy will change, depending on the location, demands and demographics.

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Other Considerations When Flipping Properties

In the Australian property market, additional considerations have made property flipping a difficult property investment strategy:

1. High Entry Cost.  You have to factor in property stamp duty (approximately 5.5%, depending on state), legal, mortgage, building and pests inspections fees.

2. High Exit Cost.  Real Estate Agency listing fees (approx 2%), sales conveyancing, property staging.

3. Capital Gains Tax (CGT).  If CGT applies to you, up to 50% of your profit will be included into your annual income tax returns.  Have a chat with your accountant to understand how CGT applies in your circumstances.

4. Renovation Costs.  You'll need to factor in the cost of renovating the property.  Unless you are a hands-on handy-man, you will find that high labour cost often makes the renovation project non-viable. 

5. Variable timing. You will also need to consider that the tradesman may also not be available at the required time to work on your project. 

6. Holding Costs.  Many investors forgot to factor in holding costs.  And as a result, they ended up making a loss in the reno-flip strategy.  You'll need to include mortgage setup costs, mortgage interests, and any exit fees.  

7. Mortgage claw-backs. If you are getting a mortgage for the renovation project, you need to know that some lenders may claw back mortgage commissions from their brokers, if you end the mortgage facility within the first couple of years.  When that happens, brokers will usually, recover this lost commission from you, the property investor.  A good mortgage broker or lending team is critical to getting this right.  

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While a successful property reno-flip is rare in Australia now, we've helped many property investors manufacture equity from their property renovation strategy.  Our property advocates are always monitoring the property market and we have been able to spot good properties for property flipping quickly.

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Keen to find out more?

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Sign up for our monthly undervalued property list, to be informed of potential properties for a quick flip around Australia. 

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